Mr Rajagopalan Krishnamurthy of Towers Watson analyses the major changes in India’s bancassurance distribution, the channel coveted by every insurer in the country.
Bancassurance is grabbing headlines in India at a time when the insurance industry is showing signs of a slowdown.
Most insurers are evaluating their distribution challenges following major regulatory changes introduced last year that resulted in a serious dent in product profitability, escalation in cost and expense management and brought to the forefront structural issues facing their agency force.
In the face of growing market pressures and struggle by management to measure up to shareholder expectations, insurers have come to regard bancassurance as a major panacea.
Key attraction
Ironically, not all companies recognised the potential of bancassurance when the market opened up in the year 2000. Those that had banks as equity partners, and those that had tied up distribution pacts with more than one bank, had a head start and are now reaping considerable benefits.
Commercial banks in India operate through a huge network of over 80,000 branches covering almost every location, metro and rural. About 200 million individuals keep saving bank accounts with banks. A McKinsey study last year on the changing face of financial services across 13 Asian markets commented that banks in India enjoy a high customer loyalty factor, with customers showing the highest preference (95%) to deal with a local institution.
The banking sector is growing at an average rate of 20%. It accounts for about three quarters of total assets of financial institutions, and it plays a crucial role in financing trade and industry as well as the credit needs of individual customers. The 27 state-owned banks (all of them publicly listed with government ownership pegged at a minimum of 51%) enjoy a dominant 75% share in the deposits and loans business.
Growth
Bancassurance is regulated by two regulators in India, the Reserve Bank of India (RBI) and the Insurance Regulatory and Development Authority (IRDA). While the latter has restricted banks to act as an agent for only one life and one non-life insurer, RBI has chosen not to allow banks to promote insurance broking companies.
India has a total of 47 national banks, 36 foreign banks, as many as 2,700 urban and district level cooperative banks and 82 rural banks. This large number has helped insurers to steadily develop their new business from the bancassurance channel, which reached about INR119 billion (about US$2.6 billion) last year. While this accounted for about 11% of gross new business, for private players the share of bancassurance business was close to 30%.
Newly licensed insurance companies and those that missed the ‘bank grab’ opportunity in the early days (together with those that suffered the exit of bank distributors in the wake of bank partners joining new ventures providing equity support), have found the current rule of ‘one bank, one insurer’ working against their expansion plans.
Insurers taking stakes in banks
Some of them started aggressively pursuing banks to switch distribution loyalty with the offer of a slice of equity. An arrangement last year by Max New York Life which offered a 4% stake to Axis Bank, a promising private sector bank, for exclusive distribution during the next 10-year period helped the insurer register a dramatic rise in new business income through the bank.
A recent proposal by the owners of MetLife to offer a huge 30% stake to the public sector Punjab National Bank on attractive terms to penetrate the bank’s huge clientele is awaiting regulatory clearance.
As a few other banks have started evincing interest in such sweetened bancassurance deals, the regulators have expressed reservations. The RBI’s concern is on account of potential risks the banks run with holding an equity stake in insurance companies, considering the fragile financial strength of the banking business and their rising capital needs. The insurance regulator is concerned about the high cost of bancassurance deals in general, and how insurers have not performed sufficiently to cover the huge rural and bottom-of-the-pyramid bank customers that sorely lack insurance.
Emerging scenario
A report submitted in June 2010 by a committee of the IRDA to examine ways to revamp the bancassurance channel (on which the author served as a member) concluded that the current bank distribution framework needs an overhaul, and contained some key observations:
• Life companies have chosen to use bancassurance to promote solely unit-linked investment products to further their top line business focus at the cost of more relevant protection and traditional products suited to the bank customer mix. With an eye on commission, banks have displayed a bias to push single premium products, and there are several complaints about banks mis-selling regular premium products as single or limited payment plans.
• Insurers have rewarded banks beyond the ceiling rates of commission fixed by the IRDA by declaring excess payments under various expense headings.
• Despite high commissions, banks have adopted a passive approach and largely followed a referral model to the insurers’ sales personnel posted at bank branches, resulting in low service standards to customers buying insurance. Only about 8% of all bank branches in the country engage in any insurance selling, with the help of less than 50,000 trained bank salespeople (half of who are attached to one bank, State Bank of India, and who are tied to its captive insurance company). About 90% of bank sales staff are posted at urban centres, leaving a huge number of rural branches largely untapped for insurance selling.
The committee recommended that the way forward is to allow banks to distribute the products of two insurance companies (life and non-life) to bring greater competition and sales focus.
In November 2011, the regulator circulated a consultative paper proposing a state-wise liberalisation of bancassurance based on insurance penetration levels. The proposal divided the insurance market in India into three zones, and restricted banks to tying up with a single insurer in a maximum of nine out of 13 states in Zone A which shows higher penetration, and to maximum of six states in Zone B. However, an insurer can have the same bancassurance partner for all the states under Zone C which has recorded the least penetration.
New models
It remains to be seen how this cautious proposal to open up bancassurance distribution if implemented will pan out in 2012 and beyond. Bank-owned insurance ventures have voiced their disagreement to let their captive bank partners distribute products of another insurer.
Given the current low rate of cross selling in banks in general (at less than 1% of the customer population), the key to taking bancassurance to the next level is for banks to take a more focused interest in distribution and train a large number of their staff to offer insurance solutions based on sound principles of needs analysis.
For this purpose, a solution may be to allow banks to set up distribution companies that can hire staff and train them for cross selling insurance and other products, and who undertake distribution for more than one insurer.
There can be multiple models in Indian bancassurance to cover urban and rural branches, along with channel specific products offered as group and individual policies. This channel-to-product “mapping and matching” would be relevant for life, non-life and health insurance companies, and also could expand pension and annuity business through the enormous bank network.
As bancassurance matures, the RBI may also need to relook at its reservation to let banks promote broking outfits in the interest of providing wider options and advice based approaches to customers.
Lots more to be done
In summary, the regulator’s zeal to utilise bancassurance as a tool to spread cost effective insurance cover to the huge bank customer base remains somewhat unfulfilled due to an apparent lack of commitment and sound insurance knowledge on the part of banks.
With regards to insurers, they are yet to come up with truly cost-effective products for the bancassurance channel and help re-engineer the sales and service processes at bank branches. Thus, while the potential continues to dazzle all the stakeholders, serious solutions remain elusive.
Mr Rajagopalan Krishnamurthy is Managing Director (Products, Distribution and Markets) at Towers Watson, based in Mumbai.